Understanding Forensic Audit

Understanding Forensic Audit

With the ever-rising burden of Non Performing Assets (NPAs), RBI has asked Public Sector Banks to conduct a forensic audit of top 50 loan defaulters to separate genuine cases of business failure from those where funds have been diverted.

What is Forensic Audit?

A forensic audit is an examination and evaluation of a firm’s or individual’s financial information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. It is the process used to examine an individual’s or a company’s financial information for use as evidence in court.

The investigation process under forensic audit follows a similar path as a regular audit of financial statements. The steps can include planning, review and a report. If the investigation was undertaken to discover the presence of fraud, evidence is presented to uncover or disprove the fraud and determine the amount of the damages suffered. The findings are presented to the client — and possibly the court should the case go that far.

What is difference between Forensic and Financial Audit?

A forensic audit and a financial statement audit have separate objectives that do not overlap.

Forensic audits are conducted if there are suspicions of an asset-theft fraud while financial audits aim at providing assurance on business’s financial statements.

Forensic audits are helpful in cases where there has been theft of company assets or on suspicion that company might be engaging in theft. A financial statement audit is not specifically designed to detect these types of issues.

RBI & other Authorities on Forensic Audit for Public Sector Banks:

Reserve Bank of India has made forensic audit mandatory for large advances and re structuring of accounts. The Enforcement Directorate and the Serious Fraud Investigation Office have underscored the need for forensic audit following the rise in money laundering and wilful default cases that are plaguing the banking system. The enactment of the Benami Property Act increases the importance of it in the country’s fight against financial offenders.

Forensic Audits as a tool to tackle NPAs:

While many of the stressed loans (bad loans + restructured loans) may be due to the slowing economy and wrong policies, some could be due to malfeasance. Forensic audits work their magic on the latter. For example, in a recent case, forensic auditors found that a company with huge cash reserves had surprisingly applied for loans. Later, the company was labelled as a wilful defaulter.

Another reason why banks insist on a forensic audit is to have their decision backed by an independent recommendation. This way, they are not blamed if the restructured account fails to recover.